[PDF] Full Federal Court confirms Government grant is an assessable

View - Download Full Federal Court confirms Government grant is an assessable

Previous PDF

Next PDF

TaxTalk²Insights

Capital Projects and Infrastructure

www.pwc.com.au )XOO )HGHUMO FRXUP ŃRQILUPV *RYHUQPHQP JUMQP LV MQ MVVHVVMNOH

UHŃRXSPHQP RLPOLQ PM[ OMR

22 February 2018 Explore more insights

In brief

In the recent decision in Denmark Community Windfarm Ltd v Commissioner of Taxation [2018] FCAFC 11 (Denmark Community Windfarm), the Full Federal Court held that a Commonwealth Government grant to partially fund the construction of wind turbines was an assessable recoupment within the meaning of tax law. Under the assessable recoupment provisions, an amount received as a recoupment of deductible expenditure is required to be returned as assessable income in the year of receipt, or over the period for which deductions can be claimed.

In detail

The Denmark Community Windfarm matter primarily concerned the scope to which the assessable recoupment provisions in Subdivision 20-A of the Income Tax Assessment Act 1997 (ITAA 1997) applied to the Commonwealth grant received by the taxpayer (Denmark Community Windfarm). The grant was

received from the Commonwealth Government to fund 50 per cent of the cost of construction of two wind

turbines. Deductions for the cost of construction were available under the capital allowance provisions in

Division 40 of the ITAA 1997. Having sought and obtained a private ruling confirming that the grant was

neither assessable as ordinary income (under section 6-5 of the ITAA 1997) nor as a bounty or subsidy

(under section 15-10 of the ITAA 1997), the taxpayer argued in Court that the grant was not an assessable

recoupment under section 20-20 of the ITAA 1997.

Assessable recoupments

The rules dealing with the treatment of assessable recoupments (Subdivision 20-A of the ITAA 1997) provide that a recoupment of deductible expenditure is assessable income. However, Subdivision 20-A

only has effect where the income is not otherwise ordinary income or statutory income, thereby operating

as a provision of last resort. The rules broadly capture two types of recoupments: Amounts received by way of insurance or indemnity, where the taxpayer can deduct an amount for the loss or outgoing in the current year or an earlier year under any provision of the tax law (the first test); and Any other recoupment of a loss or outgoing, where the taxpayer can deduct an amount for the loss or outgoing in the current year, or an earlier year, under a specified list of provisions of the tax law (the second test).

PwC Page 2

Denmark Community Windfarm argued that the grant did not satisfy either of these tests on the basis that: the grant was not received by way of indemnity or insurance (hence failing the first test); it did not claim any deductions for the loss or outgoing (having claimed deductions for depreciation or decline in value as opposed to the actual loss or outgoing), and the simplified depreciation rules (in Subdivision 328-D of the ITAA 1997), under which it claimed its depreciation deductions are not included in the specified list of provisions relevant for the second test (even though Division 40 of the ITAA 1997, containing the general rules for depreciation, is included in the list).

The Full Court found for the Commissioner on all aspects, concluding that the grant was received by way

of indemnity and, that under the proper construction of the relevant provisions, a deduction for

depreciation was a deduction for the cost of the relevant depreciating asset (the loss or outgoing). Hence

The Full Court also noted that, whilst not necessary given its conclusion on the first test, the grant also

met the conditions of the second test as Denmark Community Windfarm was able to deduct an amount

for the loss or outgoing under a listed provision (that is, Division 40 of the ITAA 1997) which is all that is

necessary for the purposes of the test.

Amounts received by way of indemnity

The Full Court considered a number of previous cases that dealt with the application of section 20-20 of

The Full Court noted that while this phrase may have been intended to apply broadly, the majority of the

High Court in Federal Commissioner of Taxation v Rowe [1997] HCA 16 rejected the general principle

that an amount received by a taxpayer to compensate for an item that has previously been allowed as a

deduction was assessable. In addition, the Full Court noted previous case law had established that a

payment will generally not be regarded as an indemnity unless the entitlement to its receipt precedes the

event in respect of which it is paid. In the present case, the grant was received pursuant to an agreement with the Western Australian

Generation Program. The agreement provided that the grant was to meet 50 per cent of the costs incurred

in construction of the wind turbines, up to a specified maximum. Given these circumstances, the Full

Court held that:

nsate a government subsidy or rebate does not affect the position. The amounts nevertheless bear the character of compensation for a liability, loss or expense

PwC Page 3

Deduction for the loss or outgoing

A critical element of the first test is that the taxpayer can deduct an amount for the loss or outgoing for the

current year, or an earlier income year, under any provision of the Act.

1997 relates to the decline in value of the depreciating asset. In doing so, the Full Federal Court came to

deductions where the relevant outgoing is the cost of the depreciating asset. The reasons for the decision provided by the Court included: which are spread over the effective life of the asset. Therefore, a depreciation deduction under Division 40 or Subdivision 328-D of the ITAA 1997 may be said to be a deduction of an amount The specific inclusion of Division 40 in the table in section 20-30 of the ITAA 1997 supports the

construction that deductions for the cost of a depreciating asset is M GHGXŃPLRQ µIRU POH ORVV RU

The construction favoured by the Full Federal Court is consistent with the purpose of the for a depreciating asset with its financial and economic cost of the asset.

The takeaway

Taxpayers need to take care when entering into monetary compensation arrangements in respect of the construction of assets, as the Full Federal Court's decision in Denmark Community Windfarm gives a

which are deducted under a provision of the Act that is not listed in the table in section 20-30 of the ITAA

1997 (such as, for example, Division 43 deductions for capital works).

It is also worth noting that this case did not address the other critical feature of the assessable recoupment

provisions, being section 20-40 of the ITAA 1997 which deals with the timing of the recoupment.

Practically, the operation of this provision in respect of a single asset means that there is a mismatch

between the timing of a taxpayer's income and deductions. That is, the whole of the depreciation deduction in an income year is subject to recoupment, and not just the portion that relates to the recouped cost. Our recent experience with the Australian Taxation Office (ATO) on Government grants or subsidies the ATO to Denmark Community Windfarm that section 6-5 or section 15-10 of the ITAA 1997 does not notwithstanding Taxation Ruling 2006/3. To the extent the grant was otherwise assessable, then the assessable recoupment provisions would not apply.

‹ 2018 3ULŃHRMPHUORXVHFRRSHUVB $OO ULJOPV UHVHUYHGB HQ POLV GRŃXPHQP ³3RF´ UHIHUV PR 3ULŃHRMPHUORXVHFRRSHUV M SMUPQHUVOLS

formed in Australia, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a

separate legal entity. This publication is a general summary. It is not legal or tax advice. Readers should not act on the basis of this

publication before obtaining professional advice. PricewaterhouseCoopers is not licensed to provide financial product advice under

the Corporations Act 2001 (Cth). Taxation is only one of the matters that you need to consider when making a decision on a financial

product. You should consider taking advice from the holder of an Australian Financial Services License before making a decision on

a financial product. Liability limited by a scheme approved under Professional Standards Legislation.

WL127057726

For a deeper discussion of how these issues might affect your business, please contact: +61 (2) 8266 0574
glenn.oconnell@pwc.com

Luke Bugden, Sydney

+61 (2) 8266 4797
luke.bugden@pwc.com

Steve Ford, Sydney

+61 (2) 8266 3433
steve.ford@pwc.com

Kirsten Arblaster, Melbourne

+61 (3) 8603 6120
kirsten.arblaster@pwc.com

Mark Edmonds, Sydney

+61 (2) 8266 1339
mark.edmonds@pwc.com

Trinh Hua, Sydney

+61 (2) 8266 3045
trinh.hua@pwc.comquotesdbs_dbs8.pdfusesText_14

[PDF] ato invalid abn

[PDF] ato log in

[PDF] atoc uk

[PDF] atoi vulnerability

[PDF] atom motors graphene 22

[PDF] atomic habits audiobook free download

[PDF] atomic habits epub

[PDF] atomic habits full book pdf free download

[PDF] atomic habits in hindi pdf free download

[PDF] atomic habits pdf vk

[PDF] atomic habits pdf worksheets

[PDF] atomic habits read online

[PDF] atomic habits summary pdf

[PDF] atomic habits tamil pdf free download

[PDF] atomic habits workbook pdf